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4 Ways Traffic Lights are like Commission Structures

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The insights into how salespeople think are interesting in this blog post. Take some time to think about how you approach commissions.

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4 Ways Traffic Lights are like Commission Structures

Cities around the country that have installed energy-efficient traffic lights are discovering a hazardous downside: The bulbs don't burn hot enough to melt snow and can become crusted over in a storm – a problem blamed for dozens of accidents.

The law of unintended consequences, often cited but rarely defined, is that actions always have effects that are unanticipated or unintended. At EthoTech, we’ve had a ringside seat to watch this law hold true in the arena of sales compensation – across many commission plan structures and industries. Here are four unintended results from well-meaning commission plans:

1 – how much will I make?

Whether or not you know it, your salespeople are calculating their commissions. They may do it daily, monthly or quarterly, but it is being done. They may do it correctly, they may do it incorrectly, and it may take them a long time. The time they spend out of their work day largely depends on the plan’s structure.

If your structure has too many variables or terms that are ambiguous, the salespeople are most likely spending valuable time trying to figure out what they are making. Plans with clear goals and measurements, along with scheduled reporting, mean the salespeople spend more time selling and less time figuring.

2 - who collects the money?

Some companies pay full commission but only when payment is received – no matter when that is.

Other companies reduce the salesperson’s commissions as the invoice ages. They find that the salespeople are in the best position to convince the customer to pay, as they already have the relationship. However, the balance between spending time collecting money and focusing on selling new business can easily tip.

Whether salespeople are in charge to collect or that duty falls to another department, your company’s cash position improves dramatically by decreasing the number of days in which customer payments are received. Business processes that can be seen as non-sales related should also factor in to your plan design when thinking of your company’s vision regarding cash flow, revenue etc.

3 - What to do with this old inventory?

It’s the end of the season and you have leftover inventory, so you cut prices to push this inventory out the door. If the salespeople are responsible to help this happen and their commissions are based on margin (i.e. profitability of the product) or percent of sale, their commission has effectively been reduced. As you can imagine, this can result in salespeople NOT pushing those items.

Plans that consider how price changes affect commissions can help make sure the salespeople are motivated, and in this case, the inventory is cleared out.

4 – Why are you holding that (SAND) BAG?

Many successful sales commission plans utilize accelerators, where salespeople are paid more for selling more, and some have caps, where sales above a certain threshold are not commissionable. Most of these plans reset quarterly or yearly. Without careful design, these plans could encourage sandbagging – holding sales until the next commission period – affecting your companies’ cash flow.

Make sure your salespeople have the green light to sell by making clear, purposeful decisions about the variable compensation plans they are offered. Talk to your salespeople and other companies, see what they have done, what has worked, and what hasn’t. Find out what caused the accident at the crusted over stop light.

John Stulak

EthoTech, Inc. – THE Commission Experts

EthoTech is a proud sponsor of reImagine in Fargo and GPUG Summit in Reno!